When Prime Minister Gordon Brown reshuffled his cabinet last week, fending off a challenge to his authority, a significant outcome was the creation of one of the most powerful ministerial jobs Britain has seen in years.

Peter Mandelson, a former European commissioner who has twice served in British governments in the past and twice been forced to resign, was reconfirmed as secretary of state for business, but also given greatly expanded authorities that make him a powerful if unofficial number two to Brown.

Much fun has been made of Mandelson’s new title, which because he has been elevated to the House of Lords in order to serve in the cabinet now officially reads as:

“Baron Mandelson of Foy in the county of Herefordshire and Hartlepool in the county of Durham, Lord President of the Council, First Secretary of State, and Secretary of State for Business, Innovation and Skills.”

But the length of the introduction aside, Mandelson’s new post puts him at the heart of tackling Britain’s worst recession in 60 years and planning for how the Labour government is going to rebound from a 20-point deficit in opinion polls to mount a challenge at the next election, due by June 2010.

Almost immediately it has also put pundits on watch about the possibility of Britain joining the European single currency, however unlikely that may be in the near term, since Mandelson is a committed European and euro-phile.

In comments in Germany last week, he described adopting the currency as “obviously” still an objective for the government.

“It is perfectly clear that the euro has been a great success in anchoring its eurozone members during this financial crisis,” Mandelson said after a speech in Berlin.

“Does it remain an important objective for Britain to find itself in the same currency as that single market in which it interacts? Obviously yes,” he said, adding: “That has to be a decision taken on the right terms, in the right circumstances and conditions, and therefore at a future time than we have now.”

Despite his hedging, bookmakers responded quickly to his comments, shortening the odds on Britain joining the euro before the end of the next parliament to 10/1.

“Europe and the single currency is always a divisive issue,” odds-maker Ladbrokes said. “But Lord Mandelson’s increasing power base means that it may again rise to the top of the political agenda.”

Surveys show that most of the British public does not favour giving up the pound for the euro, but many exporters and importers are keener on its adoption, which would neutralise exchange rate risks, even if it would also get rid of the comparative advantages sterling fluctuations can create. Almost 60 percent of Britain’s trade is with the European Union.

Brown and his predecessor Tony Blair always sidestepped the euro issue, but Mandelson’s newly influential role may allow him to nudge it back onto the agenda.

For Gordon Brown on his U.S. trip it has been a case of when the cat is away the mice will play. While Brown was at the White House working to shore up the “special relationship” with President George W. Bush, rebellion broke out in Labour ranks at home.

First, Labour peer Lord Desai launched an extraordinary attack on Brown, telling the Evening Standard: “Gordon Brown was put on earth to remind people how good Tony Blair was.”

Then it emerged that a junior member of Brown’s government, Angela Smith, was threatening to resign over Brown’s abolition of the 10 pence tax rate — a move that many Labour MPs fear will hit the low-paid and hurt Labour in May 1 local elections.

Smith’s on-off resignation was played out in real time on the 24-hour news channels. And just as Brown was about to give a news conference with Bush at the White House, news that Smith had told colleagues she was ready to quit broke.

The threat evidently caused consternation among Brown aides. A resignation of even such a junior minister when Brown was striding the world stage would have been hugely embarrassing.

There was silence from Smith’s office for several hours as, behind the scenes, Brown got on the phone to Smith to persuade her to change her mind. Then Smith issued a statement saying:”Resignation of my post … is not envisaged.”

So have the rumblings of discontent over Brown been blown out of proportion during a quiet news week? Or does it signal that his 10-month-old premiership is in irreversible decline?

When parliament reopens on Monday, Brown faces a revolt among Labour backbenchers over the removal of the 10 pence tax rate and over Brown’s controversial plans to extend the time terrorism suspects may be held from 28 to 42 days.

Brown may be forced to compromise on both issues if he is to avoid a humiliating parliamentary defeat.

More than 60 MPs, many of them Labour, have signed a parliamentary motion urging the government to change the tax system to make sure the low-paid pay less tax.

Brown’s poll numbers are terrible. A Sunday Times poll this week showed the collapse in Brown’s personal popularity ratings was worse even than the drop suffered by Neville Chamberlain after Hitler’s invasion of Norway in 1940.

The Conservatives opened a 16-point gap over Labour in that poll, and worryingly for the government, are now consistently scoring above the 40 percent of the vote mark that could give them a breakthrough at the next general election.

To make matters worse for Brown the credit crunch has tarnished the reputation for economic competence that was his main trump card. A Financial Times poll this week showed Brown was less trusted than any other major western European leader in being able to steer his country through the financial whirlwind.

And Brown can’t seem to buy any luck at the moment. After chafing in Blair’s shadow during a decade of prosperity, the sub-prime crisis broke within months of Brown taking power, bringing down Northern Rock and sowing worries about job losses and falling house prices.

Brown even chose to visit the United States the same week that Pope Benedict was attracting huge crowds there, pushing the little known British leader into the shade.

The slide in their party’s fortunes has unsettled Labour politicians, some of whom are beginning to pine for Blair’s sure touch which won Labour three elections.

Lord Desai said Labour was on track for a “bad result” in the May 1 local elections. If Labour’s Ken Livingstone loses the London mayoral race, “it would be absolutely traumatic for the party,” he said.

Desai was quoted as saying that many senior figures in the party were already thinking about who will succeed Brown. However, most experts dismiss talk of a leadership
challenge any time soon.

Brown can claim some success from his U.S. trip. He appears to have firmed up the initially shaky relationship he struck up with Bush. And he scored an undisputed diplomatic triumph by arranging meetings with all three U.S. presidential candidates.

It was a sign of the importance they place on the U.S. relationship with Britain that Barack Obama, Hillary Clinton and John McCain found space in their busy schedules for strictlyequal, 45-minute meetings with Brown.

Brown must hope he can carry as much weight with his own restive backbenchers.

The government should look at ways of opening communication channels with groups like al Qaeda and the Taliban if it wants a long-term political solution as well as a security solution, a former senior aide to Tony Blair says.

Jonathan Powell, who served as Blair's chief of staff between 1995 and 2007, told the Guardian newspaper that such a policy helped secure a peace deal in Northern Ireland.

He was quoted as saying that a secret back channel between the British government and the IRA, first opened in the 1970s, was one of the key factors that contributed to a peace deal three decades later.

"It's very difficult for democratic governments to do - talk to a terrorist movement that's killing your people," he was reported as saying.

"[But] if I was in government now I would want to have been talking to Hamas, I would be wanting to communicate with the Taliban; and I would want to find a channel to al
Qaeda."

The Foreign Office said it was "inconceivable" that it would ever seek to reach a mutually acceptable accommodation with al Qaeda, and has called on disaffected Afghans to renounce violence.

It has also told Hamas "dialogue is impossible so long as one party is dedicated to violence and the destruction of the other".

Can peace be achieved without dialogue, and if not, at what point do you begin talking?